Traffic slows at Starbucks

Starbucks launches its first national television advertising campaign today to drive more people into U.S. stores, which saw a 1 percent falloff in traffic last summer.

U.S. sales still rose 19 percent, partly because of a 9-cent price increase on coffee drinks, according to Starbucks' fourth-quarter earnings released Thursday.

The traffic decline has executives worried, and they announced several broad initiatives: conducting a prime-time TV campaign between now and Christmas, having district managers spend more time in stores and cutting back on the variety of drinks they serve.

For the drinks, "it's a performance issue," Chief Executive Jim Donald said in a phone interview. "If they're not hitting the hurdle rates, they go."

Mostly, Starbucks officials blame rising gasoline prices, the battered housing market and other economic factors for keeping people away.

"Customers are feeling the impact of the economic slowdown," Donald said during a conference call Thursday with analysts.

Executives also know that competitors such as McDonald's are nipping at their gigantic market share.

Coffee is an almost $900 million-a-year business for McDonald's, which plans to roll out lattes, cappuccinos and other coffee drinks in the next year, Deutsche Bank noted in a recent analyst report.

"It is very difficult to see how so large a competitor growing so rapidly will not impact same-store sales" at Starbucks, the report said.

Chairman Howard Schultz said on the call that Starbucks is committed to staying No. 1.

"We understand all too well that we've built a very attractive business for others to look at and try to take away."

Schultz said he is encouraged by the potential to attract new customers in the U.S. and overseas. During the next year, Starbucks plans to open 900 stores in international markets, including its first stores in Argentina and Portugal.

Starbucks has just over 15,000 stores worldwide. It added 2,571 stores — seven stores a day — in fiscal 2007, which ended Sept. 30.

Companywide, sales grew 22 percent during the fourth quarter to $2.4 billion. Profit rose 35 percent to $159 million, or 21 cents a share.

The results met analysts' expectations, according to a Thomson Financial survey.

Still, Starbucks socked investors with sobering projections for fiscal 2008. The company:

• Lowered the estimated number of new stores for the year from 2,600 to 2,500.

• Lowered its anticipated range for earnings per share.

• Lowered its expected sales growth to 17 to 18 percent from 18 percent.

• Projected same-store sales growth of 3 to 5 percent, a lower range than its usual 3 to 7 percent. In the past, Starbucks regularly beat that range, often with double-digit growth.

During the fourth quarter, same-store sales — at stores open at least 13 months — rose 4 percent for the third quarter in a row, worrying some Starbucks is overbuilding.

Starbucks' stock went into a free-fall after the earnings announcement, which came after the close of regular trading. After a 15-cent decline to $24.10 in regular trading, shares plummeted $1.88 to $22.22 in after-hours trading. The stock has traded between $22.57 and $40.01 over the past year.

Starbucks officials are "being realistic by taking the guidance down," said James Walsh, an analyst at Bellevue-based Coldstream Capital Management, which owns Starbucks shares as part of $1.2 billion it manages for wealthy individuals.

Walsh thinks the market is overreacting and said his hopes for Starbucks are pinned largely to its international growth plans. As it opens more stores in existing overseas markets, its costs in those areas should fall and improve profit margins.

"The reason we're still in it is the international story," Walsh said. "If they start guiding that they can't continue the pace of international store openings, I'll be more cautious."

The plan to open 100 fewer stores than originally expected in fiscal 2008 involves domestic, not international, markets.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com